What price growth? n a period when many companies have looked to juice their earnings by cutting costs rather than investing in the future, tech has provided a rare shot in the arm for growth-starved investors.
This week’s downward lurch in the stock market is the latest sign that things are starting to change. Third-quarter financial results over the coming weeks will provide a chance to reassess. The questions starting to percolate to the top of investors’ minds: What has it cost to deliver the kind of growth the market has been clamouring for — and will a slowing economy finally force a rethink about how long the growth spurt can go on?
The shock from Wework’s failed IPO last month has been echoing back through the private markets, where many “growth stage” companies have preferred to remain rather than going public. Backers who seemed willing to buy growth at any price have been sent a clear message: Wall Street is not about to bail them out.
Read Also: Short sellers pile into Wework debt
It is never easy for a company to make the transition from being a pure growth play to one judged on its ability to generate free cash flow. But that is now an unavoidable necessity.
Uber burnt through $9bn in the three years leading up to its IPO, and another $1.9bn in the first half of this year. Even after raising more than $8bn at the time of its public listing, its wilting share price is a clear sign of the limits of investor patience. The adjustment is already underway. Uber is limiting its new electric bike and scooter services to a handful of markets, choosing to refine the business model before expanding into all the cities it operates in. That is a revolution in thinking for a company whose name once stood for breakneck expansion.
But how to take its foot off the accelerator without giving up on some of its biggest opportunities? The food delivery market is in the middle of the sort of capital devouring growth spurt that ride hailing saw three or four years ago.
Following its IPO, Uber’s painful adjustment is playing out in full view of Wall Street. Other unicorns will now have to make similar course corrections — if necessary, putting off stock market listings until they have refitted their business models for more cautious times.
For other high-growth public tech companies, meanwhile, Wall Street has started to re-evaluate some of its most optimistic assumptions. The air has started to go out of the most overstretched valuations, but there is still plenty of room for further deflation.
